Mumbai: High inflation in India, previously considered unacceptable, should not be accepted as “the new normal” and the central bank cannot afford to drop its guard, a deputy governor said on Tuesday.
The Reserve Bank of India has raised interest rates eight times since March 2010, with more rises expected, but headline inflation still topped expectations at 8.31% in February.
“Despite significant actions on policy rates and liquidity by the Reserve Bank of India, inflation remains high, giving rise to some very fundamental questions,” RBI deputy governor subir gokarn said.
“Is this high rate of inflation previously believed to be unacceptable now the new normal?,” Gokarn said.
Gokarn said high growth - the economy is expected to have expanded by 8.6% in the year that ended in March - was contributing to high inflation.
“India’s central bank cannot afford to be slack on inflation,” Gokarn said after his speech. “Restraint now for growth later is the tradeoff that needs to be kept in mind”.
The benchmark five-year overnight indexed swap rate rose 7 basis points to 8% from the day’s low while the one-year rate climbed 8 basis points to 7.44% after the statements from Gokarn were perceived to be hawkish. They had closed at 7.96% and 7.39% respectively on Thursday.
Inflation across Asia has been on the rise as central banks appear willing to tolerate rising prices as a side effect of rapid growth.
While India’s longer-term prospects remain bright, at least four major banks have cut growth forecasts in recent weeks for India in the year that started in April.
The latest cut came on Monday from Credit Suisse, which lowered its 2011/12 growth estimate to 7.5% from 7.7% while raising its average wholesale price index inflation projection to 7.6% from 7.0% for the year.